Investor Overconfidence and Trading Volume

• Published in: The Review of financial studies Vol. 19; no. 4; pp. 1531 - 1565
• Main Authors: Statman, Meir, Thorley, Steven, Vorkink, Keith
• Format: Journal Article
• Language: English
• Published: Oxford Oxford University Press 01-12-2006; Oxford Publishing Limited (England)
• Subjects: Coefficients; Confidence; Data analysis; Econometrics; Economic psychology; Financial research; Financial securities; Hypotheses; Institutional investments; Investment analysis; Investment policy; Investors; Loss; Mathematical models; Overconfidence; P values; Regression analysis; Scholarships & fellowships; Securities markets; Securities returns; Securities trading volume; Self-perception; Small cap investments; Standard deviation; Standard error; Stock exchange; Stock prices; Stocks; Studies; Time series; U.S.A; Variable coefficients; Vector autoregression; Volatility; United States > US
• ISSN: 0893-9454; 1465-7368
• DOI: 10.1093/rfs/hhj032

The proposition that investors are overconfident about their valuation and trading skills can explain high observed trading volume. With biased self-attribution, the level of investor overconfidence and thus trading volume varies with past returns. We test the trading volume predictions of formal overconfidence models and find that share turnover is positively related to lagged returns for many months. The relationship holds for both market-wide and individual security turnover, which we interpret as evidence of investor overconfidence and the disposition effect, respectively. Security volume is more responsive to market return shocks than to security return shocks, and both relationships are more pronounced in small-cap stocks and in earlier periods where individual investors hold a greater proportion of shares.